Why most mergers are doomed

FEW OF us can remember a time when corporate profits were so good - whether measured by absolute value, by return on assets or as a proportion of total national product.

That, of course, is good for stock markets, and one reason why they have recently done so well. Go back to January, however, and markets were heading the other way. Profit levels and analysts' forecast were the same, but people took a different view of what it all meant.

The problem is where the profits come from - apart, that is, from the accounting trickery of releasing excessive provisions made a couple of years ago.

Outside the financial sector, few companies that have reported this year have delivered significant sales growth. This is not just a British problem afflicting the likes of Unilever. It has hit European companies like Nestlé and other giants like Reuters, yesterday, and Diageo, today.

Their profits may be rising but their sales are falling. This means their improved financial performance is coming from a shrinking business and is dependent on management's ability to keep cutting costs. But you can't cut for ever, and sometimes not at all.

Governments don't like plant closures, and even where those are permitted it is hard to avoid pension and healthcare costs. Often, the bigger and more well-established the corporation, the bigger the legacy issues.

If a company is overtaken by a disaster which puts its survival in doubt - like Reuters - then far-reaching change may be possible. But if life remains comfortable it isn't.

While most corporations pretend to be united round common goals, they are more often a mass of warring factions, where the self-interest of line managers and local and regional chiefs leads them regularly to frustrate the desires of head office.

That is why mergers and acquisitions are back on the agenda, with billions spent or pledged in the past few weeks and many more deals surely on the way. Some are genuinely opportunistic but most are seized upon as a means of helping a company escape its internal paralysis.

It is not that boards really expect them to work - they hardly can, given that studies show up to three quarters of them fail. It is more that they cannot think of any other way to address their company's problems.

Rueing the splits

THE groundbreaking, £194m settlement between the Financial Services Authority (FSA) and the main parties involved with the marketing and management of split-capital investment trusts, announced on Christmas Eve, may not after all be the end of the matter.

News came yesterday that the fund management industry faces a levy of up to £27m from the Financial Services Compensation Scheme (FRCS), which is separate from but watched over by the FSA, to compensate private investors in splits who lose money as a consequence of a default by a fund management firm.

That may turn out to be a storm in a teacup in that normally the FRCS collects money as and when it needs it, and there is no great current evidence of need.

More tricky from everyone's point of view is a growing murmur of discontent over just which of the splits shareholders should share in the compensation already agreed. Initially, the deal has been couched in terms of helping holders of zero dividend preference shares, as they appeared to be the ones facing the most drastic losses.

Not in every case, however, because as many as 22 zeros out of 70 may well reach their stated redemption price in time. Others may not get all the way there but will grow sufficiently to deliver a profit on the cost of the original investment.

The holders therefore stand to be considerably better off than many of the holders of income shares, a point not lost on Roland Fernsby, a retired independent financial adviser who is launching a campaign to draw attention to the income holders, whom he describes as the real splits victims.

Private investors in income trusts were relatively few in number but were almost all drawn from among the least well-off investors - the widowed, disabled and retired - who sought with an inadequate amount of capital to derive the largest possible income to supplement their pensions.

But the misinvestment that lay at the heart of the splits debacle caused dividends to collapse and the income stream to dwindle to such an extent that the shareholdings have, in many cases, effectively been wiped out.

Fernsby plans to urge the Treasury Select Committee to intervene to see if something might be done to assist this group, which he says is small but very hard-pressed. He deserves to be listened to.